Optimal Technology License Contracts with Quality Improvement Under Stackelberg Competition

Abstract

As society develops, the phenomenon of technology licensing is becoming more prevalent. This paper analyzes the optimal licensing contract for the patentor with a quality improvement innovation in a Stackelberg duopoly market. We examine and compare two licensing contracts (fixed-fee licensing and royalty licensing) in terms of the patent-holding firm’s profit, consumer surplus, and social welfare. We also study the impact of quality differences on the choice of licensing contract. One might expect that consumer surplus and social welfare are greater under fixed-fee licensing. However, we show that this conclusion seems to be untrue under quality improvement technology licensing. Moreover, we find that (1)A royalty fee is always better than a fixed-fee authorization for the innovator’s profits; (2) Relative to social welfare, there is a threshold between fixed-fee authorization and concession authorization, and when this threshold is exceeded, concession fees are adopted, and vice versa for fixed-fee authorization.